Will surge pricing become the new normal?
For some, "surge pricing," the use of algorithms to automate price increases on products and services in periods of high demand and limited supply, adheres to a basic principle of a free market economy. Others see it as a form of price gouging. Regardless of your point of view, the use of surge pricing appears likely to increase as a growing number of companies in the on-demand economy test its application.
Uber has received the most media attention for its use of surge pricing. The taxi alternative company claims surge pricing helps to improve customer service levels. According to its site, "At times of high demand, the number of drivers we can connect you with becomes limited. As a result, prices increase to encourage more drivers to become available."
Not everyone, particularly riders, are happy with Uber’s use of surge pricing. An app called Cut the Surge, claims to be able to predict Uber’s rate for the upcoming hour. If a warning of a surge comes up on the Uber app, Cut the Surge will tell you when you can expect rates to return to normal.
Sources: Uber, OpenTable
Another company, OpenTable, claims that surge pricing may be the answer for diners looking for a table at restaurants where it is next to impossible to get a reservation. The table management company recently began testing its Premium Reservations service. According to the site, OpenTable diners have told the compnay that they are "willing to pay for last-minute, prime-time reservations at popular restaurants."
Typically OpenTable, which was acquired last year by Priceline for $2.6 billion, will charge an additional $50 for a table of two with Premium Reservations. Getting a table for a party of four will run an added $100.
Cosme in New York City is participating in a pilot with OpenTable to make "a handful of tables" available for late bookers on Friday and Saturday nights. All of the added reservation fees charged by OpenTable will go to Cosme. If the test proves successful, OpenTable plans to roll out its Premium Reservations more broadly.
"As the leader in restaurant reservations, our diner demand and data is unmatched, so we believe we can capture more value for prime-time tables," Vannie Shu, product marketing manager, platforms, content & discovery for OpenTable, told GeoMarketing. "Giving guests without the ability to plan ahead (last-minute business travelers, unexpected celebrations, etc.) the opportunity to be seated will delight those in need of your hospitality. Plus, reaching OpenTable’s most frequent diners, our app users, doesn’t hurt either. The experience for restaurants should be seamless as we integrate this into our leading table management system."
- What is surge pricing? – Uber
- How to never get slammed with Uber surge pricing again – BGR
- Cut The Surge
- Testing, Testing: Get More from your Hottest Seats – OpenTable
- Now Testing: Premium Reservations in NYC – OpenTable
- OpenTable Begins Testing ‘Surge-Pricing’ Type Option For Coveted Reservations – GeoMarketing
Discussion Questions
Do you see surge pricing being used by more service companies in the months and years ahead? Are there other industries outside of transportation and foodservice that seem tailor-made for surge pricing? Is there a potential for certain types of retailers to use it, as well?
Poll
BrainTrust
Nikki Baird
VP of Strategy, Aptos
Peter Fader
Professor of Marketing, The Wharton School of the Univ. of Pennsylvania
Surge pricing or margin recovery pricing will someday be everywhere. As demand increases for limited supplies the price will lift — no matter the service or product. It is one of the best ways for retailers to get more margins from the demanding, new style shoppers. Take video games and Generation Zers. They must have new games that come out — they must. It is their life and most parents could care less. Keeps the kids busy (as they become addicted to the gaming world). So if a game company says only so many seats or cartridges available for certain games the Generation Zers will pay more (and why do they care? It all goes to their parents charge cards). Surge pricing — the way to deal with the Millennials and Generation Zers.
It doesn’t matter if surge pricing can be defined as a free market strategy or gouging. If the customers think it’s gouging they will walk, and that’s the end of the business, maybe even for an out-of-control taxi company. In retailing and food service everyone has options, and surge pricing, which looks to me like it could easily become excessive ($50-100 extra for a table?), may drive customers to those options. Only if a restaurant or retailer has inelastic demand does this seem to be a good option.
Judging by the bad feelings associated with Uber’s surge pricing and the amount of similar competitors who publicize their lack of surge pricing as an added benefit (Manhattan is currently covered in ads from Gett boasting about their $10 anywhere south of 110th Street fee) I can’t see surge pricing becoming the new normal. Offering a premium service for an additional fee (like Amazon Prime) is seen as acceptable to customers and I can see that spreading further. For instance Uber could charge an additional fee to “cut the line.” But at the moment price surging just seems to drive your customers to the competition.
Supply and demand. This has been driving consumer pricing for ages. This is simply leveraging technology to automate this to a degree. The pricing can be even further optimized with analytics tools to determine the maximum profit and revenue. So $50 per table may not even be the upper limit for the right table. This is applicable for any industry. Consumers are willing to pay a premium for the right offer, bottom line.
I think it’s definitely on the increase, but how effective it will be as it scales in popularity still remains to be seen. There is a point where even the most profligate consumer will balk at the idea of paying a ridiculous premium for the right to spend their money.
As to what industries are more likely to test surge pricing, we might look at entertainment, travel, hospitality and, yes, even high-end retailing.
The airlines, urban express lanes, hotels and gas industry (in a much more crude form of course) are all using surge pricing. Consumers don’t like it because it embodies the part of the free market they don’t like — that other “Golden Rule” (he who’s got the gold rules). But it does make sense.
As for “Others see it as a form of price gouging.” — as opposed to what? The lunacy the retail industry has engaged in for years? You know, the part where we all decide to sell pumpkins below cost at Halloween.
Anyone can have any pricing strategy they want including surge/gouge pricing. Just don’t brag about it in your loyalty campaigns.
People with lots of money don’t care if you double a fee and, in fact, not caring is kind of a badge of honor. Surge pricing means that something in the market environment has changed and vendors can take advantage of it. But the world most customers live in hasn’t changed to their advantage. Whatever money they have to do what they need to do is still the same.
We have a major hurricane heading toward the east coast — is it time to get those algorithms working so retailers can increase prices at just the right time? Come to think of it, that would give a whole new definition to “surge” pricing.
My humble advice for all occasions: Do what’s right.
As the popularity of convenient service applications increases, it is inevitable that surge pricing will become more widespread. In the case of Uber, surge pricing is particularly appropriate because the pricing level can impact the number of drivers available as well as the number and profitability of pickup requests at the same time.
Surge pricing can also be appropriate for retailers when there is truly a limited supply of a particular item, such as books signed by the author, limited runs of designer clothing and rare gemstones. In such cases where there is truly a limited supply, as the supply starts to dwindle, it makes sense for the retailer to consider increasing the prices. Algorithms can help them figure out how to do that and at what level they should do it.
The introduction of surge pricing will increase, however when surge pricing continues is debatable. This is similar to the concept of dynamic pricing tested and abandoned by Coca-Cola in their vending machines and the airlines which have always received negative customer feedback. While surge pricing has the opportunity of generating more margin, it also has the opportunity of decreasing demand as consumers walk away when they are unwilling to pay the higher price. If consumers walk away from your company to a competitor they may not come back to you.
I’m sure people don’t like to pay more for a ride when there are few cars and lots of demand, like, for example, after a concert gets out. But there’s a big difference between that — acknowledging outsize demand against limited supply — and price gouging, which would be like trying to apply “surge pricing” to bottled water and bread and plywood when a hurricane is coming. People looking for rides have options, even if some of those options just got more expensive. People looking for basics during an emergency don’t have options. As long as retailers keep that in mind, I think we’ll all be okay.
And as for the restaurants, I’ve been part of parties that got seated right away after slipping the hostess $100. So, the OpenTable concept is just formalizing something that happens anyway — but now the cash goes into the restaurant’s pocket, instead of an individual’s. That’s okay by me.
I see the bulk of surge pricing as price gouging. The OpenTable example is one case where it might work because the cache of popular restaurants plays into the premium pricing mentality.
In the case of retailers and e-tailers, surge pricing is likely a loyalty killer.
Consumers hate surge pricing, and who can blame them. Retailers and foodservice providers who move in that direction do so at the risk of alienating customers.
As many have said, surge pricing is nothing new and has been going on forever. The ups and downs in the price of oil are based on the same idea. The main reason why consumers don’t like Uber-style surge pricing is because it is short-term and is often driven by factors like bad weather, which makes it look unfair.
Get used to it, consumers! Surge pricing is here to stay, and that’s a good thing in most circumstances. It is a more natural way for markets to operate, and smart retailers can learn a lot about the value of their customers (and the value of their products/services) from it.
In contrast, price gouging is a bad thing, and retailers/consumers will quickly learn the difference between it and surge pricing. The increased ubiquity of surge pricing will actually help retailers and consumers learn where to draw the line and avoid crossing it.
Surge pricing is a tricky business from a customer satisfaction perspective. Transportation and services business that you can justify short term cost increase for increased capacity may be able to get away with it, but surge pricing for physical products is very hard to pull off.
Psychologically, time-based, short-term surge pricing is hard for many consumers to get used to.
I have news about price surging: merchants have always done it! It’s just faster and better. I love it, wish I’d had the technology when I was a merchant.
I remember once when we were selling out of a critical piece of our inventory because the item was selling much faster than planned and a senior merchant said to me, “here’s how you slow it down: take the price up.” Problem solved. And if you take the price up and it keeps selling, you’ve really got something there—double that order!
It’s just classic “what the market will bear” tactic A.
There is a fine line between surge pricing and paying a premium for a service you want. Those who understand this and get it right will win. Others will run their customers away.
If I think it’s worth it to me to pay a premium for a table in a che-che restaurant for last minuet seating, so be it. If I am booking a flight and it happens to be in high demand and all of the other carriers are colluding with that price, that is gouging. Why? Because the seat is available.
In the Open Table example, Cosme is buying seats from the restaurant to sell to those willing to pay the premium. That is a gamble on their part and if they are right about the demand, they have a business. If the restaurant owns the seat then it’s first come, first served.
Will we see more of this? Sure, but watch that fine line.
And that’s my 2 cents.
While surge pricing is here to stay, retailers need to carefully assess whether or not it’s a fit for their particular business and customer base, especially consistency with their desired price perception in the market. For example, a low price leader would be ill advised to pursue such a strategy, while it may be a great fit for a luxury play. If surge pricing is a fit with a retailer’s desired image, it needs to be implemented with the perception of increased value—after all, “time is money”!
I agree with most of the comments, that just because “you can” doesn’t mean “you should.” The limiting factors of this practice are adverse publicity and customer alienation. But I also agree we will see more of it, and more legal challenges to it.
Despite the pious claim that “this is the way markets work,” supra-normal prices are actually a sign of market inefficiency (there isn’t enough supply at prevailing prices). The danger, of course, is that algorithms will find more and more situations where supply can be artificially limited to maximize profits; this is what we saw with the infamous Daraprim example, and what we see in a more general sense with airlines (seating totals haven’t returned to pre-recession levels because restricting them is more profitable).
Energy and commodity suppliers have been using these market schemes for decades and the results have been nothing less than suicidal. It is only only a matter of time before you are holding goods for twice what you can sell them for or running short on hot items. Consumers run on small budgets with level incomes hampered by inflation. When faced with rapid price changes on a short term basis they will do without, work with bare minimums or find an alternative resource. Something to think about before playing this lottery game.
Why do so many people have a problem with surge pricing? It’s been the standard for airlines and hotels for decades—they call it yield management. The only difference is, thanks to the transparency of the Web, the consumer knows when they will be paying more than the regular price.
The savvy consumer knows how to work around surge pricing—it’s the value-conscious (read: cheap/free) consumer who is upset that they have to pay more for something that they know they can get for less if they are willing to be flexible. This is the same consumer who will put up with any form of advertising to get free online coupons, use free WiFi, and play free mobile games.
Uber is not, and was never meant to be, a free or sponsored alternative—just another option for those of us who don’t want to use existing transportation services (e.g., taxis, subways, trains, buses, biking, walking). We all know, consumers are in the driver’s seat when it comes to which services will survive and which ones will die and so far, surge pricing hasn’t killed off Uber. As for Uber, I’ve seen how their model has significantly impacted the way the limo and taxi industry does business and it’s definitely a change for the better.
Surge pricing is based on the most basic supply and demand principles. Travel and leisure companies have been doing surge pricing for years, and customers understand this (even if they don’t enjoy it). Even with basics, such as fruits and vegetables, prices fluctuate based on supply and demand and the time of year. “End of season” sales are based on the same principle; when the product is new and highly in demand the price is higher, but after a period of time the product buzz wears off, demand decreases, therefore prices also need to. I see the same becoming acceptable, and even the norm, in additional industries such as in restaurants, entertainment and others. For more on dynamic pricing checkout our related infographic.
There are certain industries (such as pharmaceuticals) and situations (such as during drought or war) where surge pricing will only cause harm to retailers and manufacturers, but overall as technology improves and becomes more accessible, we will see an increase in the use of surge pricing in many industries.